Highlights
The next Federal Reserve rate hike may not be in December after all, based on an unexpectedly weak personal income and spending report that includes very soft inflation readings. Income is the best news in the report as it managed the expected 0.2 percent August gain getting boosts from proprietor income, transfer receipts and also rent. Wages and salaries, in part reflecting a decline in hours, came in unchanged though this follows strong growth in the prior 2 months. Another weakness in today's report is a 1 tenth downward revision to overall July income which now stands at 0.3 percent. The savings rate held unchanged in August at a moderate 3.6 percent.

Now the bad news starts. Spending came in at only 0.1 percent as spending on durables, the likely result of Hurricane Harvey's late month hit on Texas and related declines in auto sales, fell a very steep 1.1 percent to fully reverse strength in the prior month. Spending on both nondurables and services actually inched forward in August to 0.3 percent each.

The really bad news comes from inflation readings as the core PCE price index, which is the Federal Reserve's central inflation gauge, inched only 0.1 percent ahead while the year-on-year rate fell backwards, down 1 tenth to 1.3 percent for the weakest result since November 2015. Overall prices, likely getting a small boost from a Harvey-related spike in gasoline prices, rose 0.2 percent with this yearly rate, however, also moving backwards, down 1 tenth to 1.5 percent. All these inflation readings, interestingly, came in no better than Econoday's low estimates.

Data in this report, after inflation adjustments, are direct inputs into third-quarter GDP and the results will pull down estimates. Real spending fell 0.1 percent in August to cut in half July's 0.2 percent gain. The Bureau of Economic Analysis which compiles the report could not quantify Harvey's effect and had to make estimates for missing data. Yet the impact appears obvious and is the most tangible hurricane effect so far to hit the nation's economic data. The next hurricane effects will be coming from Irma's September strike on Florida.

Recent History Of This Indicator
Both income and spending rebounded in July but not the Federal Reserve's PCE price indexes which remained lifeless. Personal income is seen is rising 0.2 percent in August vs July's 0.4 percent gain though consumer spending, reflecting August weakness in retail sales, is expected to slow to a 0.1 percent increase vs 0.3 percent in July. PCE prices, both overall and for the core, managed only 0.1 percent gains in July with the year-on-year rates both at a very soft 1.4 percent. Overall prices, boosted by higher energy prices that in part reflect gains for energy, are expected to rise 0.3 percent with the yearly rate seen at 1.5 percent. Core prices, which exclude both energy and food, are seen rising 0.2 percent in the month for a yearly rate of 1.4 percent in specific results that would not further heighten expectations for a December rate hike from the Federal Reserve.

Definition
Personal income represents the income that households receive from all sources including wages and salaries, fringe benefits such as employer contributions to private pension plans, proprietors' income, income from rent, dividends and interest and transfer payments such as Social Security and unemployment compensation. Personal contributions for social insurance are subtracted from personal income.

Personal consumption expenditures are the major portion of personal outlays, which also include personal interest payments and transfer payments. Personal consumption expenditures are divided into durable goods, nondurable goods and services. These figures are the monthly analogues to the quarterly consumption expenditures in the GDP report, available in nominal and real (inflation-adjusted) dollars. Economic performance is more appropriately measured after the effects of inflation are removed.

Each month, the Bureau of Economic Analysis also compiles the personal consumption expenditure price index, also known as the PCE price index. This inflation index measures a basket of goods and services that is updated annually in contrast to the CPI, which measures a fixed basket.

Changes in taxes or social security cost of living adjustments can cause some sharp variations in monthly disposable income growth. However, on the whole, monthly changes in disposable income fluctuate less than monthly changes in personal consumption expenditures.Data Source: Haver Analytics

Monthly changes in personal
consumption expenditures are
usually skewed by large changes
in spending on durable goods.
Spending on nondurable goods
and
services tend to be less
volatile
from one month to the next.Data Source: Haver Analytics